The Flaw In Europe's Austerity Plan: Elections

Getting Europe's mainstream politicians and appointed technocrats to agree
to bailouts and austerity was actually the easy part. The real challenge for
these guys will be holding onto their jobs -- and preserving the deals they've
cut -- in upcoming elections.

Voters, it seems, aren't convinced that that a depression is the only solution
to the euro's design flaws. Faced with the immediate reality of poverty, they're
listening to formerly fringe voices calling for a better deal, either in the
form of more help from Germany (via the European Central Bank) or a quick exit
from the euro zone and a return to national monetary sovereignty. Greece, of
course, is first in line:

Greece's
Fringe Parties Surge Amid Bailout Ire
ATHENS--Weeks after agreeing to an agonizing bailout deal with Europe, Greece
is splintering politically ahead of national elections, raising the risk
that it won't be able to make the economic sacrifices still needed to keep
it in the euro.

The election, not yet scheduled but expected in April or May, is shaping
up as a public revolt against Greece's political establishment, which has
backed the austerity policies that are the price of financial life support
from Europe and the International Monetary Fund. Mainstream politicians are
increasingly painted as leading Greece into a debt trap, then impoverishing
it in trying to escape.

Half the electorate plans to vote for radical opposition groups, ranging
from Soviet-style Communists to anti-immigrant neo-Nazis, according to recent
opinion polls. That could lead to growing political instability even if the
established parties cling to power, undermining Greece's ability to enact
the drastic spending cuts and economic overhauls its creditors demanded.

"Most people here think the two big parties shouldn't have power anymore," said
Costas Papaioannou, a 32-year-old teacher of German at a night school who
used to be a loyal New Democracy voter but "not anymore."

Mr. Papaioannou said his German classes have "never been so full, because
many people who want to emigrate are studying the language."

He said the state of the country depresses him. "We're furious at what is
happening. Everyone is scared, and without hope."

Signs of economic collapse are more visible in Athens's riot-scarred center,
where growing numbers of homeless people huddle under blankets outside closed
stores. Burnt-out buildings exude a whiff of charcoal from violent protests. "For
rent" signs adorn broken marble facades on once-bustling boulevards, while
long lines of taxis wait for fares.

The austerity measures "taken under pressure" from Germany "are exceptionally
adverse for the Greek people," said Giorgos Karatzaferis, head of the nationalist
party Laos. Extra austerity measures due in June "are completely repulsive," he
said, vowing to fight them.

"The reality is that after the elections, Greece will be an absolute mess," said
Anthony Livanios, a political risk consultant. "With no clear majority in
Parliament, a very high far-left representation and rising social unrest,
this is a recipe for chaos," he said.

The election will be Greeks' first chance to choose their rulers since the
debt crisis began in late 2009. Since last fall, Greece's government has
been led by an unelected, technocratic prime minister, Lucas Papademos, supported
by the two established parties: the conservative New Democracy party and
the center-left Socialists, known as Pasok.

Mr. Papademos's mission was to secure a €138 billion ($183 billion)
loan package from Europe and the IMF to keep Greece afloat. On Monday, a
government spokesman said elections will be held on April 29, May 6 or May
13.

New Democracy, led by Antonis Samaras, is likely to be the largest party
in the new Parliament. Many analysts expect it to form a bipartisan coalition
with Pasok. But the two parties' combined support is only 35% to 40%, according
to several opinion polls. In Greece's 2009 elections, they won around 75%
of the total vote. The decline shows the price they are paying for supporting
unpopular austerity policies, and for their past misrule.

To get the bailout, Mr. Samaras and Socialist leader Evangelos Venizelos
both had to promise Europe in writing that they would continue the austerity
measures. Among other promised steps, they pledged to pass legislation by
June that will cut public spending by an additional 5.5% of gross domestic
product. Economists say the cuts will further depress the Greek economy,
which has contracted 14% in the past four years and is expected to shrink
by a further 5% or more this year.

In spite of shaving more than €105 billion off its bond debt in this
month's default and restructuring, Greece's total public debt is still around €330
billion, or more than 160% of GDP, a level most economists say it can't repay.
Greece's budget deficit is stuck at around 10% of GDP, thanks to the shrinking
economy.

The prime minister's PP party won 50 seats in the crucial Andalusia elections
but failed to win a majority as the opposition leftist PSOE party won 47
seats.

Alastair Newton, political analyst at Nomura, said: "Failure to win in Andalusia,
whose regional deficit was more than double its 1.3pc of Spanish GDP target
for 2011 and which voted against the central government's 1.5pc target for
this year, represents a potentially serious setback in efforts to rein in
the total national deficit to 5.3pc." He added: "The outcome in Andalusia
may also make the challenges PP faces at the national level even more daunting."

Mr Rajoy faces a tough week, with a general strike scheduled for Thursday
followed by Spain's budget on Friday.Concern over Spain's ability to manage
its debts has been mounting and is likely to be the focus of the eurozone
finance meeting in Copenhagen on Friday.

Some thoughts

Can deep cuts in public spending coexist with regular elections? That's the
question that will decide the fate of the euro zone, and the answer right now
looks like a big no. A fair number of voters are starting to think that leaving
the euro zone would get the pain over with more quickly than suffering through
a decade of shrinking GDP and evaporating jobs. Put another way, when things
get sufficiently bad the typical person starts thinking "what have I got to
lose?" and voting for change, any change.

The problem is that the European financial system is so interconnected that
even one small country leaving might spark a bank run in the other likely candidates,
which might push the whole continent into political and economic chaos. Given
this choice, one has to wonder if future election results will just be ignored,
with the people in charge simply declaring an emergency and going on with their
plans.

From here on out every major election is an "event risk" that threatens the
eurozone as a financially viable democracy.

John Rubino edits DollarCollapse.com and has authored or co-authored five
books, including The Money Bubble: What To Do Before It Pops, Clean
Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar
and How to Profit From It, and How to Profit from the Coming Real Estate
Bust. After earning a Finance MBA from New York University, he spent the
1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst.
During the 1990s he was a featured columnist with TheStreet.com and a frequent
contributor to Individual Investor, Online Investor, and Consumers Digest,
among many other publications. He now writes for CFA Magazine.